Mish's Global Economic Trend Analysis

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Japan Seeks to Hike Taxes then Waste Money on Stimulus to Make Up for Decline in Spending; Currency Crisis Awaits Posted: 31 Aug 2013 06:01 PM PDT Politicians and economic illiterates frequently assume two wrongs make a right. Here is a case in point: Japan panel backs sales tax hike coupled with stimulus. Japan's government won backing for a controversial decision to raise the national sales tax in 2014 after influential members of a special advisory panel said the step would not threaten economic recovery or business confidence if it was coupled with other stimulus. Prime Minister Shinzo Abe convened the panel to hear a wide range of views on whether to press ahead with a planned hike in the consumption tax to 8 percent from the current 5 percent in April. Unless Abe changes the plan, the sales tax will be raised to 10 percent in October 2015. Advocates, including officials at the Ministry of Finance, say raising the tax would be an important first step in trying to lower public debt, which is the worst among industrialized countries at more than twice the size of Japan's economy. When Japan last hiked the sales tax from 3 percent to 5 percent in 1997, consumer spending tumbled by 13 percent in the quarter after the higher tax went into effect. That was followed by a recession. Two Wrongs Don't Make a Right When you cherry pick a panel, and the panel has a pre-determined outcome, the answer always comes out the way you expect. Thus Abe's blue ribbon panel concluded tax hikes won't hurt. And for good measure, if by some chance they do, the panel suggested wasting those tax dollars on stimulus. Good grief! Appearances of Success  Appearances of success are not the same as success. It is conceivable that such a preposterous plan might "appear" to work for the simple reason Japan's two lost decades might have finally played out on their own accord. However, that will not make the policy successful in any real sense. Raising taxes and then wasting the money are never good solutions to anything. Two wrongs don't make a right. Similarly, economists currently praise Abe's move to weaken the Yen. The Japanese economy is strengthening, but what if it was about to anyway? More importantly, it's way too early to be singing praises anyway. Japan's national debt is still rising (and that is another reason Abe needs to hike taxes). Currency Crisis Awaits I still think the Yen is going to collapse, and that will hardly be any good for a nation that imports most of its energy and food. A  currency crisis awaits Japan, and when it happens, those singing the praises of Abe will be forced to reconsider (too late of course). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Berlusconi Threatens to Topple Italian Government if Expelled From Senate Posted: 31 Aug 2013 10:54 AM PDT Former prime minister Silvio Berlusconi, convicted of tax fraud, Threatens to Topple Letta If Expelled From Senate Silvio Berlusconi threatened to bring down the Italian government if Prime Minister Enrico Letta's Democratic Party votes to expel the three-time former premier from the Senate. "We're not available to keep the government going if the left decides to prevent the head of the People of Liberty from remaining in politics," Berlusconi told a rally organized by the Army of Silvio supporters' association late yesterday, according to a statement released by the group. Letta is struggling to contain tensions that have strained his coalition government since Italy's top court upheld Berlusconi's tax-fraud conviction on Aug. 1. The Democratic Party, the biggest force in the coalition, has said Berlusconi's expulsion from the Senate is required by an anti-corruption law enacted in December 2012. Berlusconi softened his rhetoric today, saying he "didn't issue an ultimatum" and that he wants the government to continue to govern. Yet in comments broadcast by SkyTG24, he said it's "absurd" to assume that the People of Liberty would remain in Letta's coalition if the Democratic Party forced his removal from the Senate. What About Never? Bloomberg notes "The process to strip Berlusconi of his Senate seat may take weeks or months before an eventual vote in the full chamber is called." The Letta coalition would immediately dissolve if  Berlusconi carried out his threat. The best way to make sure he doesn't is to not have a vote. The second best way would be to have a vote and decide that tax fraud is insufficient grounds to expel someone from the Senate in spite of the law. Either way, there is justice for politicians (and bankers), and there is justice for everyone else. In general, this is the way it is everywhere, but most countries draw the line at conviction. Italy doesn't. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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